Rate Update: Interest Rates Continue to Defy Expectations
April 14, 2016
At the tail end of last year, a positive economic outlook prompted the Federal Reserve to raise the federal funds rate for the first time since 2008. Since the federal funds rate is closely tied to mortgage rates, everyone began bracing themselves for the rise in interest rates which was sure to follow.
However, that expected spike never materialized. In fact, interest rates have defied expectations by falling to levels we haven’t seen in over a year.
Initially, the rates did climb following the Fed’s rate hike in mid-December of 2015. According to Freddie Mac’s weekly Primary Mortgage Market Survey, the rate on a 30-year fixed-rate mortgage—which is considered the benchmark mortgage rate—rose from 3.95 percent to 4.01 percent to close out the year. However, after briefly touching the 4.0 percent mark during that last week of 2015, the rates fell every week in 2016 until the end of February, with the low coming in at 3.62 percent. The rates have ticked up slightly since then, but they’re still well below 4.0 percent.
Although most economists didn’t anticipate the interest rates falling, such a drop isn’t unprecedented. In 2004, the Fed began a string of measured increases to the federal funds rate. At the time of the first increase, the interest rate on a 30-year fixed-rate mortgage was 6.3 percent. One year later, that rate had actually dropped to 5.58 percent. Although the rate on a 30-year fixed did eventually rise back above 6.3 percent, it didn’t occur until 2006—two years after the Fed began the incremental rate hikes.
If there’s one takeaway from this rate fluctuation in the mid-2000’s, it’s that interest rates are not completely dependent on the federal funds rate. Other factors—namely current economic conditions—play a much bigger role in how mortgage interest rates are set and how they trend. Many experts believe the recent drop in interest rates is likely due (in part) to falling oil prices, China’s equity market, U.S. inflation rates below the Fed’s expectation, and a general sluggishness in the world’s economy.
Of course, for the average borrower, the reason why the interest rates are low isn’t necessarily important. What is important is the question of how long they’ll remain low. Although there are several factors in play in the near future—including the real possibility of more rate hikes by the Federal Reserve—the fact remains that investors are still somewhat leery of the overall economic conditions, both nationally and globally. As long as these doubts remain, interest rates are likely to continue to defy expectations and remain low.
As always, for the best information on interest rates and an analysis of current rate trends, talk to your mortgage professional.
For more than 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have approximately 50 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. We are located in the Town of Norwood, Massachusetts where we have been operating as Omega Financial Incorporated since 1988. Licensed by the Commissioner of Banks - License No. MB2671